Government to Take Larger Ownership Stake in Struggling Citigroup

February 27, 2009 at 6:30 PM EDT

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The Treasury Department and Citigroup announced a new plan Friday in which the government will take ownership in a larger portion of the company's stock. Washington Post reporter Binaymin Applebaum explains the move.

TRANSCRIPT

JEFFREY BROWN: Call it Citigroup rescue attempt, take three. This time, the federal government — that is, U.S. taxpayers — will take a larger ownership stake in the company.

First in October, and then again in November, the government made investments totaling $45 billion to prevent Citigroup’s failure, but the company’s fortunes and stock value have continued to decline.

Today, the Treasury Department and Citi announced a new plan in which the government will convert up to $25 billion of its loan money into common stock. In effect, the government will now own up to 36 percent of the company, making it the largest shareholder.

To walk us through this latest effort, I’m joined by Binyamin Appelbaum of the Washington Post.

Welcome back.

BINYAMIN APPELBAUM, Washington Post: Thank you.

JEFFREY BROWN: This is actually a kind of restructuring of the package, right? But the key new thing here is the ownership stake?

BINYAMIN APPELBAUM: Yes, that’s right. It’s actually a really interesting transaction, in a sense. What happened is that Citigroup — all banks need capital, money and reserve against future losses, and Citigroup has been running very low on capital.

So the government last fall gave them $45 billion that was designed to increase their capital. But because of the way the government gave it to them, most investors disregarded it. They basically said, “Doesn’t look like capital to us, doesn’t count.”

JEFFREY BROWN: The way they gave it…

BINYAMIN APPELBAUM: Right.

Preferred shares like loan

JEFFREY BROWN: But, explain, the way they gave it to them was preferred stock, which means what?

BINYAMIN APPELBAUM: That's right. So the government gave it to them in exchange for something called preferred shares, which basically meant that Citigroup agreed to pay the government 5 percent annual interest in exchange for this money.

Now, capital, basically, is money that you can keep and count on having. It's your money. You know, it's not deposits, which belong to your customers. It's not loans that you need to pay back. The most common kind of capital is the money you get by selling common shares to your stockholders. That's what capital is.

Preferred shares sounds a lot like common shares, but it's really a lot more like a loan. It's something that you basically need to pay back. And investors looked at the government's loan to Citigroup and they said, "This isn't capital. We don't view it as capital. We view the company as still needing more capital."

JEFFREY BROWN: So the new deal is to convert $25 billion of that or up to $25 billion...

BINYAMIN APPELBAUM: Yes.

JEFFREY BROWN: ... into an ownership stake of common stock?

BINYAMIN APPELBAUM: That's right. Basically, the government has said to Citigroup, "That $45 billion loan that we gave you, pay back $25 billion of it by giving us shares of your common stock and that will be, you know, acceptable." And as a result, the government now owns about 36 percent of the company.

Government at greater risk

JEFFREY BROWN: And that means that the government or taxpayers are more at risk for the downside...

BINYAMIN APPELBAUM: That's absolutely right.

JEFFREY BROWN: ... and potentially if there is an upside somewhere?

BINYAMIN APPELBAUM: That's right. So we lose out on the dividend payments that Citigroup had promised to make. They'll no longer have to make those. That's several billion dollars that the government will no longer receive.

We also lose out on the security of preferred shares. And in place of those preferred shares, taxpayers, all of us, now own common shares in Citigroup, which are much more risky and which also carry the possibility of increasing in value.

JEFFREY BROWN: And to be clear here, all those billions of dollars of bad assets which we've been talking about for months now, not affected by this?

BINYAMIN APPELBAUM: Not affected by this. Citigroup still has the problems that it had yesterday. It now has a larger reserve to deal with those problems. But many analysts believe that the scale of the problems is still greater than the scale of the resources that Citigroup has available.

Meaning of 'nationalization'

JEFFREY BROWN: Does the government get any greater say in the operation of Citigroup as shareholders?

BINYAMIN APPELBAUM: You know, this is an interesting question, because the government all along has really been able to exert tremendous influence over what Citigroup does. Even a company in which the government doesn't own a stake, a bank, is subject to tremendous regulation.

When the government became Citigroup's largest shareholder, which happened already in November, it had even more influence. A shareholder that large can always exert influence over a company. And now the government owns an even larger stake.

But, fundamentally, the government is deciding how much influence it wants to exert. It is telling Citigroup to do as much as it wants to. And thus far, the government has made a policy decision that it doesn't want day-to-day control of the company; it just wants to direct it at sort of a grander scale.

JEFFREY BROWN: Right, so the idea is to keep the bank afloat. And they've said day after day, and again today, this isn't about taking over, nationalizing banks. They don't want to do that.

BINYAMIN APPELBAUM: They keep on saying that they don't want to do that word. And the reason they don't want to do that word is that it's a very unpopular word.

But nationalization means a lot of different things to a lot of different people. If what you mean is that the government owns a stake in the bank and is giving it substantial direction, we've nationalized Citigroup. If what you mean is what Ben Bernanke suggested this week, that the government has seized total control, wiped out the shareholders, and intends to hold on to it for a while, a model we often see in other countries, then we haven't nationalized Citigroup.

JEFFREY BROWN: To make this deal work, part of the deal is that Citi has to persuade other private investors to go along, right?

BINYAMIN APPELBAUM: Yes.

Foreign governments hold shares

JEFFREY BROWN: Explain what that means. And who are we talking about there?

BINYAMIN APPELBAUM: Well, this is an interesting twist, because what happened basically is that Citigroup received investments not just from the federal government, but before it got investments from the government, it got money from several foreign governments, actually, from Singapore, from Prince Al-Waleed bin Talal of Saudi Arabia. They gave similar investments to Citigroup, basically loans, preferred shares they received in return, and they're in the same position as the government now of holding those preferred shares.

And the government basically said to Citigroup, if you want us to convert, you need to convince them to convert, as well. We're all in this together; we all need to take the same risks.

JEFFREY BROWN: And there were some signs that they were prepared to do that?

BINYAMIN APPELBAUM: They've basically said yes. They weren't offered a lot of options, but they've already essentially agreed to do that.

JEFFREY BROWN: But the bottom line here, as you're saying, the survival of Citigroup is still very much an open question?

BINYAMIN APPELBAUM: The company's challenges remain what they were before this happened.

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